Tax Saving Strategies for the 2012 Filing Season*

Whether you’re training for a marathon, landing the job of your dreams or closing a sale, you’re not going to succeed without being well prepared and fully informed.

Well, the same holds true when managing and preparing your taxes.

Waiting until the return due date of April 17th for the 2012filing season to put your financial house in order is a straight path to paying higher taxes. To manage your taxes and minimize your tax bill, you need to know the rules of the game, which are constantly changing, and you want to take advantage of year-round tax-planning opportunities.

In this presentation, I’ll share with you the most recent tax-law information, incentives and planning strategies that will not only help you complete your tax return, but may also help you minimize your 2011 tax bill.

However, before we get started, I’d like to remind you that planning and timing are critical, and that tax issues will change throughout the year.

You should therefore regularly monitor your financial situation and consult with your CPA at least quarterly if you believe you may be affected by any tax-law changes. You particularly need to work with your CPA if you had a life-changing event such as a marriage, divorce, parenthood or new business launch.

By taking the necessary responsive steps as soon as the need arises, rather than delaying action until the end of the year, you can better protect your and your family’s financial interests.

Now we’re ready to begin.

*Information is current as ofDecember 12, 2011.

NEW FOR 2011

2: Select 2011 Tax Law Changes

We’ll start today with recent tax law changes. In 2011, there were not a lot of changes from 2010. However, there was one change that affects almost all working taxpayers: the Making Work Pay Credit. This was a refundable credit up to $400 for a single individual ($800 if married) based on a percentage of earned income. The credit was essentially replaced with the 2% reduction in the employee portion of Social Security tax. This incentive is worth up to $2,136 per person. It also applies to self-employed individuals.

3: Expiring Provisions

I’d also like to discuss a few of the tax incentives that expired at the end of 2011. These incentives include the increased Alternative Minimum Tax (AMT) exemption amounts, the State/Local Sales Tax deduction, the Mortgage Insurance Premiums deduction, School Teacher Expenses and Qualified Charitable Distributions from IRAs.

We’ll be covering the AMT in a moment but I’d like to first discuss other tax incentives that expired in 2011.

The State/Local Sales Tax deduction is an election in lieu of deducting state income taxes. It is mostly used by taxpayers residing inWashington,Texas,Nevada,Floridaand other states where there is no income tax. Also, it only applies to taxpayers who itemize.

The Mortgage Insurance Premiums deduction applied to homeowners who made down payments of less than 20% of their homes’ value and were required to carry private mortgage insurance (PMI). These premiums were deductible similar to mortgage interest.

School Teacher Expenses provision provided a $250 deduction for teachers, counselors, principals and aids for books, supplies and other materials.

Qualified Charitable Distributions provision was very popular among taxpayers. It allows individuals who are over age 70½ to make a direct charitable gift from their IRA in lieu of taking a required minimum deduction.

FILING

4: The Basics

An understanding of the tax-return filing process can make tax season a more positive experience, so we’ll begin by taking a quick look at a few of the basics, beginning with the standard deduction.

5: Standard Deduction

Now let’s talk about the standard deduction – the basic deduction all taxpayers can take.

Every year, the IRS adjusts the standard deduction to account for inflation. For 2011, the standard deduction is $5,800 if single or married filing separately and $11,600 if married filing jointly or qualifying widow(er)s. It’s $8,500 if head of household.

6: Standard Deduction Additions

Taxpayers age 65 and older or taxpayers who are blind receive an additional standard deduction of $1,450 (single or head of household) or $1,150 (married filing jointly, married filing separately or qualifying widow/er).

7: Itemizing Deductions

An alternative to claiming the standard deduction is itemizing your deductions. To determine the best strategy, total all of your deductions. In general, if your total allowable itemized deductions are more than the standard deduction, then you should probably itemize, although there are exceptions.

Itemized deductions include medical expenses, certain state and local taxes, mortgage interest, charitable contributions, casualty and theft losses, and other miscellaneous items such as tax-return preparation fees, investment advisory fees and unreimbursed employee business expenses. For 2011, you may also choose to deduct sales taxes paid if you reside in a state without a state income tax. Tables for this are provided in the IRS instructions.

There is no phaseout of itemized deductions for 2011.

If you find you’re getting close to exceeding the standard deduction limit, try bunching your tax breaks every other year. This allows you to claim the standard deduction one year and itemize the next, but it also allows you to plan for the maximum tax benefit.

Also, since itemized deductions are a factor in determining if you’re subject to the AMT, which I’ll be discussing in detail, some pre-planning might help if you’re in this situation.

8: Charitable Deductions

Making charitable contributions can instill a feeling of goodwill and tax laws have been created to recognize philanthropic efforts.

Donations you make by cash, check or credit card to qualified religious, charitable, educational or other philanthropic institutions are deductible up to 50% of your AGI, if you itemize your deductions. Contributions that are not deductible include those made to political groups, fraternities and sororities, certain scholarships, for-profit hospitals, and blood banks. If your donations exceed 50%, you can carry them forward for up to five years.

Also, remember to obtain and keep a record to substantiate all donations, regardless of the amount, even cash donated to charitable organizations such as the Salvation Army’s Red Kettle drive during the holidays and when attending religious services. Substantiating documents range from a cancelled check and credit-card statement to a W-2 form and a written statement from the organization. The type and extent of documentation is usually determined by the amount of the donation.

Your charitable donations of more than $75 require a disclosure statement from the organization stating the value of any received benefit. Also, you can only deduct a charitable donation of $250 or more if you have a statement from the charitable organization showing the amount of money contributed, and a description, but not value, of any property donated and whether the organization did or did not provide you with any goods or services in return for the contribution.

Donating appreciated assets that qualify for the long-term capital gains treatment can actually do more to cut your tax bill. However, in most cases donations are limited to 30% of AGI, with excess amounts carried forward for up to five years.

When you give appreciated long-term securities to a nonprofit, you deduct the full market value of the asset at the time of the donation and you avoid paying capital gains tax on the appreciation. Be sure to follow substantiation and other requirements.

A tax deduction for clothing and household items is generally allowed only if the items are in good condition. Automobiles may be contributed to a charity, but the amount of the deduction may depend on what the charity does with the vehicle. These types of donations, as with other donations of tangible property, are included with your cash contributions to determine your annual limit. A single item with a value greater than $500 is subject to special substantiation rules.

9: Alternative Minimum Tax (AMT)

In addition to the regular income tax, more and more taxpayers are subject to the AMT.

The AMT applies to both higher-income taxpayers as well as to lower-income taxpayers with a large number of exemptions or other tax adjustments. Since the AMT is not indexed for inflation, taxpayers are increasingly finding themselves affected by the AMT.

Some items that can trigger the AMT include:

A higher-than-average number of dependency exemptions

Large deductions for state and local income taxes

High real estate taxes

Miscellaneous itemized deductions and medical expenses

10: AMT Exemption Amounts

Congress has attempted to limit the impact of the AMT by increasing the amount of exempt income.

For 2011, the AMT exemption amounts are $48,450 for single filers and $74,450 for married taxpayers filing jointly. However, the exemption amount begins to phase out when AMT income exceeds $112,500 if single or $150,000 if married filing jointly. Exemption amounts may decrease in 2012.

Unfortunately, the AMT defies most traditional tax-planning strategies. If you’ve been close to the threshold, you’ll need to consult with your CPA for specific advice on how the AMT may affect you this tax season.

TAX STRATEGIES & INCENTIVES

11: Tax Strategies & Incentives

Now that we have the basics behind us, it’s time to move further ahead. I’ve organized my presentation into six categories that all of us can relate to:

Family

Education

Job

Home

Investments

Retirement

We’ll then wrap things up with a few tips that will give you a start on preparing your tax return.

FAMILY

12: Family Tax Incentives

Let’s start with some tax breaks for which you may be eligible if you are raising a family. If you’re a parent, you want to be sure to take advantage of every tax-saving opportunity available. In this section, we’ll discuss:

Kiddie Tax

Child Tax Credit

Adoption Credit

Health Savings Accounts

Health Flexible Spending Arrangements

Dependent Care Tax Credit

Long-term Care Premium

Shifting Income

And as I mentioned, a credit is the best tax break you can get. Deductions reduce the amount of taxable income on which you must pay taxes, but tax credits reduce, dollar-for-dollar, the taxes you actually owe.

13: Kiddie Tax

A tax strategy long employed by parents was to shift assets to a child’s name with the result that the investment income would be taxed at the child’s lower tax bracket. However, recent changes make this strategy less beneficial.

To discourage income splitting of investment income between parents and minor children, the tax law has imposed a Kiddie Tax under which any investment income over $1,900 will be taxed at the parent’s tax rate. If a child has unearned income of $1,900 or less, the tax is computed based on the child’s regular tax liability. Thus, the first $950 of unearned income would not be taxed – that is the standard deduction amount for a child. The next $950 of unearned income would be taxed at the child’s tax rate.

Even if the Kiddie Tax does apply, regular tax liability must be computed, with the child paying the higher tax liability.

The tax does not apply if both of a child’s parents were deceased at the end of 2011 and regular rules are followed to determine the child’s tax.

The Kiddie Tax applies to investment income of children in these three categories: (1) children under age 18 at the end of 2011, (2) children who are age 18 at the end of 2011 and do not have earned income exceeding 50% of their support for the year and (3) children age 19 through 23 at end of 2011 and who are full-time students and who do not have earned income exceeding 50% of their support for the year. The tax also applies if the child is married and files separately.

14: Child Tax Credit

The Tax Relief, Unemployment Insurance Reauthorization and Jobs Creation Act of 2010 extended the Child Tax Credit to tax years 2011 and 2012.

The credit is worth $1,000 for each qualifying child who is under age 17 at the end of the calendar year and who qualifies as a dependent – your son, daughter, adopted child who lived with you all year, stepchild or eligible foster child, brother, sister, stepbrother, stepsister, or a descendant of any of these individuals. The child must also be aU.S.citizen, resident or national. The Child Tax Credit is in addition to the child’s dependency exemption.

That means if you have three children, the child credit can potentially reduce your tax bill by $3,000.

15: Adoption Credit

There is good news for people who are planning to adopt a child under age 18 or a person incapable of self-care due to physical or mental challenges because there are two tax benefits that offset escalating adoption expenses.

In 2011, the adoption credit, which is fully refundable, rose to a maximum of $13,360 per child. Parents who work for companies with an Adoption Assistance Program can receive up to a $13,360 reimbursement from their employer for qualified adoption expenses without paying taxes on that benefit.

When adopting a child who is aUnited Statescitizen or resident, the family is permitted to take the credit in the year following the year when the actual expense was incurred. These expenses may be taken as a credit even if the adoption ultimately is not completed. Where a foreign adoption is involved, the family may not deduct any expenses, regardless of the year incurred, until the adoption is final.

When you adopt a child with special needs, you are allowed to claim the full credit regardless of actual expenses paid.

16: Health Savings Accounts

Health Savings Accounts (HSAs) are designed for individuals covered by a High Deductible Health Plan (HDHP) and are not covered by Medicare.

HSAs offer a wide range of tax advantages: contributions within certain limits are tax deductible and earnings that accumulate within the account are not taxed until withdrawn, and even under those circumstances, withdrawals to pay for qualified medical expenses are tax free.

However, withdrawals you may make for medical expenses that are not qualified are both taxable and subject to a 20% penalty unless you are age 65 or older or disabled.

17: Health Flexible Spending Arrangements

Although employees are increasingly responsible for some or all of their medical expenses, many companies are offering Flexible Spending Arrangements (FSAs) to help employees pay for these expenses.

Employees can contribute some of their wages to these special accounts and the amounts are not taxed in 2011. Funds can be accessed any time during the year to pay for health insurance premiums as well as medical costs and other expenses not covered by insurance, although they must qualify as a deductible medical expense.

Reimbursable medical expenses include prescription medications such as over-the-counter drugs prescribed by your doctor. Beginning in 2011, the cost of non-prescription drugs other than insulin can no longer be reimbursed by an FSA.

The company’s plan determines contribution terms and limits. It is important to remember that funds not used during the year, or by the end of any grace period the plan may offer, are lost.

18: Dependent Care Tax Credit

Working parents know how expensive child care can be. The Dependent Care Tax Credit aims to ease some of the burden.

Basically, the credit works like this: If you pay someone to care for a dependent under age 13, you may be eligible for a tax credit of up to $2,100. The credit is a percentage of qualifying expenses that range from 20% to 35%, depending on your AGI. You must have earned income to receive the credit and if married, file a joint return.

The dollar limit on the expenses toward which you can apply the credit percentage is $3,000 for the care of one qualified dependent and $6,000 for the care of two or more. Thus, the maximum credit allowed in 2011 is $1,050 if you have one qualified dependent and $2,100 if you have two or more qualified dependents.

I should note that the dependent care credit is reduced by the value of qualifying day care provided by your employer under a written, non-discriminatory plan, which generally is not taxable up to $5,000 ($2,500 if married filing separately).

This credit is not restricted to child-related care costs. If you pay someone to look after an incapacitated spouse or dependent of any age, such as a parent or disabled family member, you may also be eligible for this tax break.

19: Long-term Care Premium

An increasing number of Americans require long-term care due to advanced age or chronic conditions. Unfortunately, nursing homes and their high costs, which can exceed $70,000 annually, are not covered by Medicare or supplemental Medicare insurance.

However, long-term care insurance pays for this type of care and a portion of your premiums, based on your age, is tax deductible as a qualified medical expense. The deductible increased in 2011.

You can include your premiums for qualified long-term care services as medical expenses up to the following amounts:

Age 40 or under – $340

Age 41 to 50 – $640

Age 51 to 60 – $1,270

Age 61 to 70 – $3,390

Age 71 or over – $4,240

20: Shifting Income

Investment strategies have to be right for you and appropriate for the economic environment. The current economy makes some of the following strategies more or less beneficial, depending on your circumstances. Income tax rates may increase after 2012, although there is also some movement to see the rates decreased. Regardless of what may ultimately happen, you need to be prepared to react to any change so I recommend that you first check with your CPA financial advisor on these matters.

Kiddie Tax

Now, let’s begin with strategies for how parents can save on taxes.

As we discussed earlier, shifting income to a child in a lower tax bracket can be a smart strategy and may provide the Kiddie Tax with a place in your overall tax plan. However, as I mentioned, it won’t pay to shift a significant amount of income to a child falling under the Kiddie Tax rules, but transferring a few income-producing assets to a child might still lower your overall tax bill.

And it’s important to know that shifting income to your child will also reduce the AGI on your personal return, which may mean you’ll lose less of your itemized deductions and personal exemptions. Lowering your AGI may also make you eligible for other tax benefits.

Gift Tax

Be sure to also consider the gift tax when shifting assets.

For 2011, you generally can give a gift to a child, or anyone else, valued at up to $13,000 each without being subject to the gift tax. It rises to $26,000 if your spouse agrees to split the gifts. The exclusion is allowed only for cash gifts or present interests in property.

If you think there may be any potential gift tax consequences to a transaction, make sure to consult with your CPA.

Family Business

If you’re a sole proprietor, you can shift income by hiring your minor children to help in your business. In addition to providing valuable work experience for your child, this arrangement can offer tax savings to the business.

As long as the work your children do is legitimate, you follow all the rules and your children receive reasonable wages, you can deduct their wages as a business expense and shift the money to your children in lower tax brackets.

And as an added bonus, if your son or daughter is under age 18, you don’t have to pay Social Security or Medicare taxes on the wages you pay. Also, since their wages are earned income, they are not subject to the Kiddie Tax.

EDUCATION

21 Education Strategies

Since in most cases education accounts for the greatest cost associated with raising kids, you’ll want to listen carefully to learn all you can about the credits and deductions for education expenses. Keep in mind that these benefits are available to college students of every age.

22: Tax Credits

Two popular tax credits – the American Opportunity Tax Credit and the Lifetime Learning Credit – can help defray education expenses for you and your children. And because they are credits rather than deductions, they take a bigger bite out of your tax bill. However, you cannot claim both credits for the same student’s expenses in the same tax year so you’ll need to decide which credit delivers the greater tax savings.

23: American Opportunity Tax Credit

For 2011 and 2012, the American Opportunity Tax Credit, previously known as the Hope Scholarship Credit, is available to each eligible student and for the first four years of college or other postsecondary school that leads to a degree, certificate or other recognized educational credential. It does not apply to graduate-level courses.

The maximum credit is $2,500 per student for each year and 40% of the credit is refundable, meaning it can reduce your liability below zero and you can receive up to $1,000 even if you owe no taxes.

The credit applies to 100% of the first $2,000 of costs and 25% of the next $2,000 of costs. This means you must spend at least $4,000 to obtain the maximum credit of $2,500.

Costs include tuition as well as student-activity fees required for enrollment and attendance. They also include books, supplies and equipment needed for a course of study that must be purchased from the educational institution as a condition of enrollment or attendance.

This credit is allowed against the AMT.

24: Lifetime Learning Credit

The Lifetime Learning Credit provides a credit of up to $2,000 per year. It applies so long as the American Opportunity Tax Credit is not also being claimed for the same student and can be claimed for every year that you qualify to receive it.

As its name suggests, the Lifetime Learning Credit can be used by you, your spouse or your dependent(s) for undergraduate, graduate and professional-degree expenses at an eligible educational institution – tuition as well as student-activity fees required for enrollment and attendance. It also applies to books, supplies and equipment needed for a course of study that must be purchased from the educational institution as a condition of enrollment or attendance.

Unlike the American Opportunity Tax Credit that applies to each student, the Lifetime Learning Credit applies to each taxpayer and courses taken do not need to be toward a recognized educational credential.

25: Student Loan Deduction

If you’re paying off student loans, you’ll be happy to know that the rules for deducting student loan interest remain liberal. Taxpayers can continue to deduct up to $2,500 of the interest paid on a qualified student loan as an adjustment to gross income, regardless of how long it takes to repay the loan.

And you don’t have to itemize in order to take this deduction. However, there is no deduction if you file as married filing separately, you are claimed as a dependent or the loan is from a related party or a qualified employer plan.

Similar to many other provisions, the deduction is limited for certain income amounts.

26: Higher Education Tuition and Fees Deduction

In 2011, you can claim a tuition and fees deduction – up to $2,000 or $4,000 – as an adjustment to gross income for qualified expenses that you paid for higher education at an eligible educational institution. This deduction, which is available each year you qualify for it, generally applies to the same expenses as those covered by the American Opportunity Tax Credit and Lifetime Learning Credit.

The deduction applies to you, your spouse and any dependents who you claim as an exemption.

The deduction is barred if your filing status is married filing separately, you can be claimed as a dependent, or if you claimed the American Opportunity Tax Credit or Lifetime Learning Credit. Similar to many other provisions, there are limits for certain income thresholds.

27: Qualified Tuition Programs (529 Plans)

Qualified Tuition Programs, also known as 529 Plans, give parents and other family members a tax-advantaged way to save money for college expenses. While there is no tax deduction or credit available on contributions to the plan, the money in the plan grows tax free and no tax is due on withdrawals if the distribution is used to pay for qualified higher-education expenses. There may also be state income tax breaks for plan contributors.

Expenses include tuition, room and board, books, supplies, and fees. There is no dollar limit for these expenses. Unlike 2010, computers and other technology equipment and services are no longer qualified expenses.

529 Plans are often used as vehicles for gifts from family members, especially grandparents.

28: Prepaid Tuition Plans

When saving for tuition, you are not restricted to using your state’s savings plans and can use any state’s plan. The Internet is an invaluable research tool. However, if you select another state’s plan, you may lose a state tax deduction that some states offer to residents who use their state’s prepaid or 529 Plans.

Many states have instituted savings plans substantially similar to 529 Plans that propose to create a prepaid tuition account for a student in that state. The amount contributed will depend on when the plan is begun and the child’s age. States have created actuarial tables that they believe will result in a fully funded tuition based on a schedule of deposits and investment-return rates.

The advantage of these plans is that they guarantee tuition costs will be covered. However, they do not guarantee admissions, and they do not cover room and board and the cost of books. These expenses would have to be funded separately.

The plans provide assistance if the student decides not to attend an in-state school; however, it may not cover the full tuition costs of these schools.

In general, the tax treatment of these prepaid tuition plans is similar to 529 Plan rules.

29: U.S. Savings Bonds

Generally, investors who redeemU.S.savings bonds to pay for qualified higher-education expenses may exclude the interest redeemed from gross income. The exclusion has no dollar limit and it applies to Series EE bonds issued after 1989 or Series I bonds.

JOB

30: Job Search Tax Benefit

For many of us, we spend the majority of our day on the job and the hours we typically devote to our work seem to grow even greater during rocky economic times. However, in addition to a paycheck, experience and hopefully some degree of satisfaction, we receive a number of benefits that have important tax implications, one of which pertains to our job search efforts.

Many unreimbursed expenses incurred as a result of employment are deductible as miscellaneous itemized deductions, though they can only be claimed to the extent they are greater than 2% of adjusted gross income.

Included among these expenses are job search costs. These expenses are deductible if the search is for a job in the same line of work, regardless of whether a new position is obtained. However, if a period of unemployment is lengthy, the IRS may disallow the deduction. Also, expenses for finding a first job are not deductible.

HOME

31: Homeowner Strategies

Now let’s turn our attention to the tax benefits of owning a home, because as a homeowner there are many tax-saving opportunities available to you.

32: Deductions

Mortgage Interest

In most cases, you can deduct all of the interest you pay on any loan secured by your home if you itemize your deductions. Interest is generally deductible on up to $1 million ($500,000 if married filing separately) of home-acquisition loans. These are loans used to buy, build or substantially improve your principal residence or second home, and are secured by that same residence.

Interest on a home-equity loan up to $100,000 ($50,000 if married filing separately) is also deductible. You can also use this deduction for one additional residence that you identify as your second home.

This means you can deduct interest on total home debt up to $1.1 million ($550,000 if married filing separately).

As long as the home-equity loan is secured by your home, it doesn’t matter how you spend the proceeds. Home improvements, college tuition, debt consolidation or an exotic vacation – it’s up to you. Just be sure you have a plan to pay it back.

The IRS defines points as any extra charges paid by a home buyer at closing in order to obtain a mortgage. In effect, points are prepaid interest. Points paid to secure a loan for the purchase, construction or improvement of a principal residence are usually fully deductible in the year you paid them. Points paid to buy or improve a second home must be deducted ratably over the term of the loan.

Real Estate Taxes

After the home-mortgage interest deduction, the next most important tax break for homeowners is the deduction for real estate taxes.

You can deduct as an itemized deduction real estate taxes and state and local property taxes on all the real estate you own. There are no limits on the dollar amount of real estate taxes you can deduct or on the number of homes for which you can claim the deduction. The only decision you may need to make is whether you prepay the coming year’s taxes or delay the current year’s taxes to see which way it might benefit you.

33: Selling Your Home

Excluding the gain on the sale of a home is another major incentive for buying a home.

If you meet certain requirements, you can keep a significant portion of the profit of the sale of your principal residence without having to pay tax on the gain. Any gain is taxed as a capital gain so the amount owed is not as high. However, any losses on the sale of a principal residence are not deductible.

When you sell your principal residence, you can exclude from income up to $250,000 in gains ($500,000 if married filing jointly or a surviving spouse if the sale is within two years of the other spouse’s death). If you realize a gain on the sale greater than the exclusion, that amount is taxed at capital-gains rates.

To qualify, you must have owned and used your home as a principal residence for at least an aggregate of two of the five years preceding the sale.

The exclusion is available even if you took temporary absences, including vacations, or rented out the home while not living there.

Special rules are provided for sales of the home due to certain health issues, employment reasons or unforeseen circumstances, and for members of the uniformed services.

Keep in mind that if you took a First-time Homebuyer Credit, you may have to repay or recapture some or all of the loan/credit in 2011. Also, if you used your residence as a home office, you may need to make other adjustments.

34: First-time Homebuyer Credit

The First-time Homebuyer Credit does not apply to home purchases made in 2011 unless the taxpayer or his or her spouse is a specific public employee on extended official duty outside theUnited States. The credit for other homebuyers ended with purchases completed by or in contract on April 30, 2010.

However, if you claimed the 2008 credit for a home you purchased after April 8, 2008 and before January 1, 2009, in most cases the credit must be repaid, though interest free, over 15 years in 15 equal installments. For all taxpayers, no matter the year claimed, if you sold or otherwise disposed of the home, or used it differently in 2011, you generally are required to repay the complete credit when you file your 2011 tax return.

35: Home Energy Incentives

In 2011, homeowners can again claim tax credits for making certain energy-saving improvements to their home. These credits include the (1) Nonbusiness Energy Property Credit and (2) Residential Energy Efficient Property Credit. However, the credits are not as favorable as 2010.

Under the Nonbusiness Energy Property Credit, homeowners can receive a credit of 10% of the costs of qualified energy-efficient improvements and 100% of the costs of certain energy property expenditures, although dollar limitations may apply to specific types of property, including a maximum lifetime credit of $500.

Energy efficient improvements include insulated walls or ceilings; energy-efficient exterior doors and windows, including skylights; specially treated metal or asphalt roofs; and a high-efficiency furnace, water heater or central air conditioning system, and energy property expenditures such as certain heat pumps, water pumps and circulating fans.

The 30% Residential Energy Efficient Property Credit applies to costs for qualified residential solar panels, a geothermal heat pump, solar water-heating equipment, qualified solar electric property costs and small wind-energy property. This credit has no dollar limit or principal-residence requirement. A second 30% credit for qualified fuel-cell plants has principal-residence and kilowatt-capacity requirements, and cannot be greater than $500 for each 0.5 kilowatt of capacity.

INVESTMENTS

36: Investment Strategies

Strategy and timing are as important as skill in investing, particularly with regard to taxes. There are a number of tax-smart investment strategies you may want to consider, especially in light of legislation that has lowered the tax rate on dividends and capital gains.

These same strategies can be applied during today’s difficult economic times when many people have suffered substantial investment losses. As you prepare your 2011 returns, some of these rules can help. However, be aware that Congress may make changes to them in the future.

37: Dividends

Qualified dividend income received by an individual shareholder is taxed at a top rate of 15%. It is taxed at 0% for taxpayers in the 10% or 15% income tax bracket.

38: Capital Gains Tax

The maximum tax rate on net capital gains remains at 15% for 2011. If you’re in the 10%or 15% income tax bracket, your tax rate on net capital gains is zero, and you will not be taxed for 2011. The Tax Relief, Unemployment Insurance Reauthorization and Jobs Creation Act of 2010 extended these tax rates through 2012.

To qualify for long-term tax treatment, an asset must generally be held for more than one year before it is sold. Capital gains on investments held for one year or less are taxed at regular income tax rates.

39: Offset Capital Gains with Losses

When it comes to investment decisions, knowing when to make a move is critical. Then there are times, such as those we are experiencing today, when many of our conventional ideas about investing are dramatically challenged. Many of you may be finding yourselves buying high and selling low, creating a loss.

In 2011, capital losses are netted against capital gains. If your capital losses exceed your capital gains, you can deduct up to $3,000 of your combined long-term and short-term capital losses against ordinary income.

Any remaining net capital losses may be carried forward to future years and can be used to offset future gains. It is very important to keep track of these unused losses and whether they are short-term or long-term losses.

Keep in mind that an investment sold at a loss in 2011 need not be gone forever. If you believe it was a good long-term investment, you can buy it back. Just be sure to wait at least 31 days after the sale. Otherwise you’ll get caught up in the wash sale rule.

This rule disallows losses on securities sold if substantially identical securities are bought within 30 days before or after the date of the sale, creating a 61-day wash-sale period, although the definition of “substantially identical” provides some flexibility.

RETIREMENT

40: Retirement Strategies

We all know that contributing to a retirement plan is a key step when working toward a secure retirement, but did you know it can lower your current income tax bill as well?

41: Employer Sponsored Plans

Pre-tax contributions to an employer-sponsored retirement plan reduce the amount of taxable wages you report on your tax return, making qualified retirement plans an excellent way to cut your tax bill.

Matching contributions and income earned within your plan are also tax deferred. If you have a 401(k) and you haven’t arranged to contribute the maximum, try to increase your contributions before year end. This is especially important if your employer makes matching contributions, which, in effect, represents free money.

For 2011, if you’re under age 50, your maximum contribution to a 401(k) plan is $16,500. Taxpayers who are age 50 or older by the end of 2011 can make an additional $5,500 “catch-up” contribution for that calendar year to reach $22,000 for 2011.

42: Individual Retirement Accounts (IRAs)

The top annual contribution for traditional or Roth IRAs remains at $5,000 for 2011. If you’re age 50 or older by the end of 2011, you can make an additional $1,000 “catch-up” contribution.

You cannot contribute more than your qualifying income for the year, but if your spouse has little or no income, you can contribute to either a traditional IRA or Roth IRA for your spouse based on your earnings.

Traditional IRA contributions may be deductible depending on your modified AGI and whether you or your spouse (if filing jointly) is covered by an employer-sponsored retirement plan. Also, you must begin to take minimum required distributions from the IRA once you reach age 70 ½, but this does not apply to Roth IRAs.

Roth IRA contributions are not deductible, but you can withdraw them at any time tax free. You can also withdraw earnings on contributions tax free after five years if you are age 59½ or older, disabled or paying qualifying first-time homebuyer expenses.

Earnings on both types of IRAs accumulate tax free until distributions are made.

You have until the filing deadline of April 17, 2012 to open and contribute to an IRA for 2011. But why wait? The sooner you contribute, the longer your money grows tax deferred or tax free.

43: Conversion to Roth IRA

Regardless of your filing status or income, you can convert traditional IRAs to Roth IRAs, with no dollar limit on the amount converted. However, the entire transfer must be reported as income unless after-tax contributions were made to any of your traditional IRAs. Although income tax is due on the amount converted, the 10% early-distribution penalty does not apply if you are under age 59½ and keep the funds in the Roth IRA for at least five years.

There is no modified AGI requirement needed for a conversion and it can be reversed no later than the extended due date for the 2012 tax return.

Your CPA can help you decide whether a conversion to a Roth IRA is best for you.

CLOSING

44: Key Takeaways

I know this was a lot to cover, but my key takeaways for you are these:

First, remember that your CPA can be a valuable partner in providing answers to your questions and helping to keep your tax bill to a minimum.

Second, don’t hesitate to ask a lot of questions to make sure you understand the advice you’re being given.

Third, don’t wait until tax time to seek professional tax assistance. Your CPA can help you plan for tax savings throughout the year.

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